Case Laws Companies Act Naresh Chandra Sanyal Vs Calcutta Stock Exchange Association Ltd

PETITIONER:
NARESH CHANDRA SANYAL

Vs.

RESPONDENT:
CALCUTTA STOCK EXCHANGE ASSOCIATION LTD.

DATE OF JUDGMENT:
25/09/1970

BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
GROVER, A.N.

CITATION:
1971 AIR 422 1971 SCR (2) 483
1971 SCC (1) 50
ACT:
Companies Act (7 of 1913)-Fully paid up share-Forfeiture of-
Effect-Sale of forfeited share-If illegal-Right of member to
proceeds of sale-Indian Contract Act (9 of 1872), s. 74-
Scope of.

 

HEADNOTE:
Under the scheme of the articles of association of the
Calcutta Stock Exchange Association Ltd., the Committee is
authorised under art. 21 to expel or suspend a member on the
ground inter alia that he refused to abide by the decision
of Committee in any matter which is under the articles or
under the bye-laws referred to the Committee. Under art.
22, a member declared a “defaulter” because he fails to
fulfil any engagement between himself and any other member
within six months from the date on which he has been
declared a defaulter ceases to be a member of the Exchange
automatically. Upon his ceasing to be a member and upon a
resolution being passed by the Committee expelling a member
his share stands forfeited. The share so forfeited is
deemed to be the property of the Exchange. Such forfeiture
involves the extinction of all interest in and also all
claims and demands against the Exchange in respect of the
share and all other rights incidental to the share, but, not
the liability of the erstwhile member to discharge his
liabilities to the Exchange. But the Committee must sell,
reallot or otherwise dispose of the share for the
satisfaction of the debts, which may then be due and owing
by the defaulter to the Exchange or to any of its members
arising out of transactions or dealings in stocks and
shares. The net proceeds of the sale shall be applied
towards the satisfaction of the debts, liabilities or
engagements of the shareholder and the residue, if any, paid
to the member or his legal representatives.
The appellant failed to carry out a direction to pay a
certain sum arising out of a share transaction and the
Committee after notice, declared him a defaulter. Six
months later, after notice to the appellant, the Committee
resolved that the share standing in his name shall be
forfeited to the Exchange and that the appellant be expelled
from the membership of the Exchange. The Exchange
thereafter disposed of the ‘share for Rs. 55,000. The
appellant challenged the action taken by the Exchange but
the suit was dismissed.
In appeal to this Court,
HELD : (1) It is not necessary that a resolution expelling a
member and a resolution declaring him a defaulter should
both be passed before his share is forfeited by the
Exchange. The word and is used to indicate an alternative
and does not make the two conditions cumulative, because, it
would lead to the anomalous result that a member would have
to be expelled by the Committee under art. 21 and would also
automatically cease to be a member under art. 22. [490 A-C]
Surajmall Mohta v. Ballabhdas Mohta, I.L.R 63 Cal. 531,
approved.
484
In any event, in the present case, a resolution declaring
the appellant a defaulter was passed and six months later
the appellant was expelled from the membership of the
Exchange and it was resolved that his share shall stand
forfeited. [490 C-D]
(2)(a) Regulation 24 in Table A in the First Schedule to the
Companies Act, 1913, provides for the exercise of the power
to forfeit a share when there is default in paying calls,
but no inference follows therefrom that the share of a
member could be forfeited only for non-payment of a call
made in respect of a share which was not fully paid up.
Subject to the provisions of the Companies Act a company and
its members are bound by the Provisions contained in its
articles of association. The Articles regulate the internal
management of the company and define the powers of its
officers. In the absence of any provision contained in the
Act which prohibits a company from forfeiting a share for
failure on the part of a member to carry out an undertaking
or engagement the articles of a company which provide that
in certain events membership rights of a shareholder
including his right to the share will be forfeited are
binding. There’ is no provision the Indian Companies Act
1913, which restricts the exercise of the right of the
Exchange to forfeit shares for non-payment of a call only,
and the articles of the Exchange expressly provide that in
the event of a member failing to carry out the engagement
and in ,the conditions specified therein his share shall
stand forfeited. [492 A-E]
(b) Under art. 27, the terms of which are mandatory, the
shares forfeited to the Exchange must be re-allotted or
otherwise disposed of : it cannot be retained by the
Exchange. A forfeited share is merely a shake available to
the company for sale and remains vested in it for that pur-
pose only. By forfeiting a share pursuant to the authority
of the articles of association no reduction of capital is
achieved. [491 F, H; 492 A]
Therefore, arts. 22, 24, 26, 27 and 29 relating to
forfeiture of shares are valid. [492 D-E]
Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association
Ltd., [1964] 3 S.C.R. 698, followed.
Calcutta Stock Exchange Association Ltd. v. S. N. Nundy &
Co. I.L.R. [1950] 1 Cal. 235, approved.
(3) There is nothing in the procedure followed which
rendered the forfeiture of the appellant’s share illegal.
The appellant had ample notice of the proceedings and the
orders were not made against him contrary to rules of
natural justice. [493 C]
(4)(a) Under its articles the Exchange has authority to sell
the share and to appropriate the sale proceeds towards
satisfaction of the debts, liabilities or engagements. But
the balance of the amount remaining due after satisfying the
liabilities of the appellant did not remain the property of
the Exchange. The appellant was entitled to the amount.
This is expressly provided for in art. 33. The expression
used in art. 29 ‘the forfeiture shall involve extinction of
all interest’ is subject to the rights as by the articles
saved and art. 33 saves the defaulting share-holder’s right
lo the balance remaining with the Exchange.[493 D-G]
(b) Even assuming that arts. 24 and 31 reserve to the
Exchange two distinct powers-the power to forfeit and the
power to exercise a lien, and that art. 33 only applies to a
sale in enforcement of a lien and not to a sale after
forfeiture, the balance on hand after satisfying the
liability
485
of the defaulter must still be returned to the defaulter,
under s. 74 of the Contract Act. The power of the Exchange
to forfeit the shares arises out of the articles and its
source is in contract. On the principle underlying s. 74 of
the Contract Act the Exchange had no right to hold, out of
the sale proceeds of the share, any amount in excess of the
amount due to it or to its members. [493 H; 494 A-B]
Fateh Chand v. Balkishan Das, [1964] 1 S.C.R. 515, followed.
(c) The legal theory of forfeiture is that a share
forfeited is only taken over by the company with the object
of disposing of it to satisfy its claims to enforce which
the share was forfeited and all other obligations arising
against him out of his membership. If the company is per-
mitted to retain the balance of the amount after satisfying
the debts, liabilities and engagements of the share-holder,
the transaction would not be different from one purchasing
the share of the defaulting shareholder for a value equal to
the amount of his obligation and that would be illegal. [495
E-H]

 

JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1626 of 1966.
Appeal from the judgment and decree dated July 7, 8, 1964 of
the Calcutta High Court in Appeal from Original Decree No.
143 of 1960.
R. B. Datar, for the appellant.
B. Sen, N. R. Khaitan and B. P. Maheshwari, for
respondent.
The Judgment of the Court was delivered by-
Shah, J.-Naresh Chandra Sanyal was the holder of a fully
paid-up share of the Calcutta Stock Exchange Association
Ltd.hereinafter called the Exchange’. As a member of the
Exchange he was authorised to carry on business as a broker
in shares, stocks and securities in the hall of the
Exchange. In December 1941 Sanyal purchased one hundred
shares of the Indian Iron & Steel ‘Company Ltd. from
Johurmull Daga & Company, but did not arrange to take
delivery of the shares on the due date. Johurmull Daga and
Company sold the shares pursuant to the authority given to
them by the Sub-Committee of the Exchange. The transaction
resulted in a loss of Rs. 438/10/-. The Sub-Committee
directed Sanyal to pay the amount due by him, but he failed
to carry out that direction.
On January 7, 1942 the complaint of Johurmull Daga & Company
was referred to the Full Committee of the Exchange. Sanyal
failed to pay the amount directed to be paid by him and he
was by resolution dated February 19, 1942 declared a
defaulter. On September 1, 1942, at a meeting at which
Sanyal was present, the Full Committee resolved that the
share standing in his name be forfeited to the Exchange with
effect from September 1, 1942 and that Sanyal be expelled
from the membership of the Exchange. 436Sup.Cl/71
48 6
Sanyal then instituted an action in the High Court of
Calcutta on its original side claiming a declaration that
the articles of the Exchange providing for “forfeiture of a
fully paid up share were ultra vires and illegal” and that
“particularly Arts. 21, 22. and 24 were invalid”; that the
share held by him had not been “properly forfeited” by the
Exchange and that forfeiture of the share was “irregular,
void and inoperative and was not binding upon him” He also
claimed an order that he be restored to the membership of
the Exchange and that the share register be rectified
accordingly. In the alternative Sanyal claimed a decree for
Rs. 55,0001- being the value of the share, or in any event
to the surplus of the sale proceeds after “liquidating the
debts due by him to the Exchange.” The suit was resisted by
the Exchange. The Trial Court dismissed the suit. In
appeal under the Letters Patent the decree was confirmed.
With special leave Sanyal has appealed to this Court in
forma pauperis.
The relevant Articles of Association of the Exchange are
these
Art. 21-“The Committee shall have power to
expel or suspend any member or if being firm
any member or authorised assistant of the firm
in any of the events following
(6) If the member or if being a firm any
member or authorised assistant of the firm
refuses to abide by the decision of the
Committee in any matter which under these
articles or under the Bye-laws for the time
being in force is made the subject of a
reference to the Committee.
Provided always that in every case arising
under the provisions of sub,-section (5), (6),
(7) and (8) of this Article no resolution for
the expulsion of a member or if being a firm
any member or authorised assistant of the firm
shall be valid unless passed by a majority
consisting of not less than two-thirds of the
members of the Committee at a meeting
specially convened for the purpose and at
which meeting not less than two thirds of the
members of the committee at a meeting
specially convened for the purpose and at
which meeting not less than seven members of
the Committee shah be present.”
4 8 7
Art. 22-“Any member who has been declared a
defaulter by reason of his failure to fulfil
any engagement between himself and any other
member or members and who fails to fulfil such
engagements within six months from the date
upon which he has been so declared a defaulter
shall at the expiration of such period of six
calendar months automatically cease to be a
member.”
Art. 24-“Upon any member ceasing to be a
member under the provisions of article 22
hereof and upon any resolution being passed by
the Committee expelling any member under the
provisions of Article 21 hereof or upon any
member being adjudicated insolvent the share
held by such member shall ipso facto be
forfeited.”
Art. 27-“Any share so forfeited shall be
deemed to be the property of the Association,
and the Committee shall sell, re-allot, and
otherwise dispose of the same in such manner
to the best advantage for the satisfaction of
all debts which, may then, be due and owing
either to the Association or any of its mem-
bers arising out of transactions or dealings
in stocks and shares.”
Art. 28-“Any member whose share has been so
forfeited shall notwithstanding be liable to
pay and shall forthwith pay to the Association
all moneys owing by the member to the
Association at the time of the forfeiture
together with interest thereon, from the time
of forfeiture until payment at 12 percent per
annum and the committee may enforce the pay-
ment thereof, without any deduction or
allowance for the value of the share at the
time of forfeiture.”
Art. 29-“The forfeiture of a share shall
involve the extinction of all interest in and
also of all claims and demands against the
Association in respect of the share, and all
other rights incidental to the share. except
only such of those rights as by these Articles
expressly saved.”
Art. 31-“The Association shall have a first
and paramount lien upon the share registered
in the name of each member and upon the
proceeds of sale thereof for his debts,
liabilities and engagements.
488
Art. 32-“For the purpose of enforcing such hen
the Association may sell the share subject
thereto in such manner as, they think fit.
Art. 33-“The nett proceeds of any such sale
shall be applied in or towards satisfaction of
the debts, liabilities, or engagements,
residue (if any) paid to such member, his
executors, administrators, committee, curator
or other representatives.”
The relevant bye-laws of the exchange are:
“Settlement of Disputes.-All disputes,
complaints and claims between by and against
members shall, on the application of either
party, be decided by the Committee or by a
Standing or Special Sub-Committee appointed by
the Committee for the purpose. In the event
of the matter being decided by the Committee
the decision shall be, final and binding upon
all members concerned but any member aggrieved
with the decision of the Standing or Special
Sub-Committee may, within seven days of such
decision being given, appeal to the Committee
whose decision shall be final. In the event
of any member or members refusing, neglecting
or failing to observe, carry out or comply
with any decision of the Committee,-or if no
appeal is preferred, with the decision of the
Standing or Special Sub-Committee, such member
or members so in default shall be dealt with
by the Committee under the rules, regulations
and/or by laws of the Association for the time
being in force.”
Bye-law 13-“Defaulters.–Any member who shall
fail to pay any subscription or other moneys
due by him to the Association on due date, or
who shall fail-to fulfil any engagement
between himself and another member or members
may be declared a ‘defaulter’ by the Committee
and on such declaration his name shall be
posted as a ‘defaulter’ on the notice board of
the Association and so long as the name
remains so posted he shall not be at liberty
to exercise any of the privileges of member-
ship.”
Under the scheme of the Articles of Association of the Ex-
change, the Committee is authorised to expel or suspend a
member on the ground, inter alia, that he refuses to abide
by the decision of the Committee in any matter which is
under the Articles or under the Bye-laws referred to the
Committee. A person declared a “defaulter” because he fails
to fulfil any engagement between himself and any other
member or members within six months from
489
the date on which he has been declared a defaulter, ceases
to be a member of the Exchange and his share also stands
forfeited. The share so forfeited is deemed to be the
property of the Exchange. But the Committee must sell, re-
allot or otherwise dispose of the share for satisfaction of
the debts which may then be due and owing by the defaulter
to the Exchange or to any of its members arising out of
transactions or dealings in stocks and shares. Forfeiture
of a share involves extinction of all interest in and also
of all claims and demands against the Exchange in respect of
the share and all other rights incidental to the share, but
not the liability of the. erstwhile member to discharge his
liabilities to the Exchange. The Exchange has a first lien
upon the share of a member and upon the proceeds of sale
thereof for his debts and liabilities, and in enforcement of
the lien, the Exchange may sell the share. The net proceeds
of the share subject to the lien it sold will be applied in
or towards satisfaction of the debts, liabilities or
engagements of the shareholder and the residue, if any, paid
to such member, his executors, administrators, committee,
curator or other representatives.
In this appeal counsel for Sanyal contended,
that under the Indian Companies Act, 1913, a
fully paid up share cannot be forfeited for
failure to carry out any engagement by the
shareholder other than an engagement to pay a
call made by the Company to pay unpaid
capital;
that the procedure followed by the Sub-
Committee of the Exchange was irregular in
that Sanyal had no notice of the meeting of
the Committee to declare him a defaulter;
that the Committee had no authority under the
Articles of Association to direct sale of the
share; and
that in any event Sanyal was entitled to the
balance remaining on hand with the Exchange
after satisfying his debts, liabilities and
engagements under the Articles of Association.
For failure to abide by the decision of the Committee in
respect of his liability to pay the amount of loss due to
Johurmull Daga & Company Sanyal was declared a defaulter,
and when he continued to remain a defaulter for six months
he was by resolution of the Full Committee expelled from the
membership of the Exchange. The Full Committee also
resolved to forfeit his share.. The Exchange thereafter
disposed of the share for Rs. 55,000/-. The argument raised
by counsel for Sanyal that a member of the Exchange forfeits
his share only if a resolution expelling him and
490
a resolution declaring him a defaulter are passed is without
substance. The conductive “and” between the first two
clauses of Art. 24 is used to indicate an Alternative, and
does not make the two conditions cumulative. We agree with
the observations of Panckridge, J., in Surajmall Mohta v.
Ballabhdas Mohta(1) that Art. 24 “is carelessly drawn,
because, on its literal application, before his share could
be forfeited, a member would both have to be expelled by the
Committee under article 21 and automatically cease to be a
member under article 22–Clearly this cannot be the
intention of the article and it is obvious that by a slip,
‘and’ has been substituted for “or”.”
In any event the Full Committee passed on February 19, 1942
,a resolution declaring the appellant a defaulter. The
appellant did not carry out his engagements for a period of
six months there, after. By resolution dated September 1,
1942 at a meeting of the Full Committee the appellant was
expelled from the membership of the Exchange and it was
resolved that his share shall stand forfeited.
There is no provision in the Indian Companies Act, 1913,
which restricts the exercise of the tight of the Exchange to
forfeit :share-,, for non-payment of a call only. The
Indian Companies Act, 1913, made no provision relating to
forfeiture of shares. By s. 17(2) of the Act, a company
could adopt the regulations contained in Table A in the
First Schedule but the Company was not bound to do so.
Regulations 24 to 30 of Table A dealt with the power and the
procedure relating to forfeiture of shares. Regulation 24,
it is true, provided for exercise of the power to forfeit a
share when there was default in paying calls, but no
inference follows therefrom that the share of a member could
be forfeited only for non-payment of a call made in respect
of the share which was not fully paid up.
In The Calcutta Stock Exchange Association Ltd. v. S. N.
Nundy & Co.(2), Harries C.J. after examining the provisions
of the Companies Act 1913 reviewed the decisions of the
Courts in England and of the High Court of Calcutta and
observed that the Indian Companies Act as well as the
English Companies Act contemplate, recognize and sanction
forfeiture generally and not for non-payment of calls only;
that a company may by its Articles lawfully provide for
grounds of forfeiture other than nonpayment of call, subject
to the qualification that the Articles relating to for-
feiture do not offend against the general law of the land
and in particular the Companies Act, and public policy; and
that the forfeiture contemplated does not entail or effect a
reduction in capital or involve or amount to purchase by the
Company of its
(1) I. L R. 63 Cal. 531.
(2) I. L. R. [1950] 1 cal. 235.
491
own shares nor does it amount to trafficking in its own
shares. The Court in that case was concerned to determine
the true effect of the Articles of the Exchange which fall
to be interpreted in this case.
This Court in Sri Gopal Jalan & Company v. Calcutta Stock
Exchange Association Ltd.(1) also considered whether
forfeiture of shares resulted in reduction of capital
contrary to the provisions of the Companies Act where power
of forfeiture was given by the Articles for failure to carry
out an undertaking or satisfy an obligation of the member to
forfeit the shares. The Court in that case was interpreting
the Articles which fall to be interpreted in this appeal.
The Court held that the Exchange was not liable to file any
return of the forfeited shares under S. 75(i) of the Indian
Companies Act, 1956 when the same were re-issued. The Court
observed that when a share is forfeited and re-issued, there
is no allotment, in the sense of appropriation of shares out
of the authorised and unappropriated capital, and approved
the observations, of Harries, C.J. in S. N. Nundy’s case(2)
that “on such forfeiture all that happened was that the
right of the particular shareholder disappeared but the
share considered as a unit of issued capital )continued to
exist and was kept in suspense until another shareholder was
found for it”. In the view of this Court, the shares so
forfeited may not be “allotted’ in the sense in which that
word is understood in the Companies Act. The Court also
pointed out that re-issue of forfeited shares is not
allotment of the shares but only a sale, for, if it were not
so the forfeiture even for non-payment of call would be
invalid as involving an illegal reduction of capital.
Article 27 of the Exchange it may be recalled is in terms
mandatory. The share forfeited to the Exchange must be re-
allotted or otherwise disposed of : it cannot be retained by
the Exchange. The share after forfeiture in the hands of
the Company is subject to an obligation to dispose it of.
On that account there is no reduction of capital by mere
forfeiture.
Mr. Datar appearing for the appellant however contended that
in Sri Gopal Jalan & Company’s case(1) the parties argued
the case on the footing that Articles of Association of the
Exchange were not invalid, whereas in the present case the
validity of the Articles is challenged. But the Court in
citing with approval the observations of Harries C.J. in S.
N. Nundy’s case(2) did in effect pronounce upon the validity
of the Articles.
A forfeited share is, therefore, merely a share available to
the Company for sale and remains vested in the Company for
that purpose only. By forfeiting a share pursuant to the
authority of the
(1) [1964] 3,S. C. R. 698.
(2) I. L. R. [1950] 1 Cal. 235.
492
Articles of Association, no reduction of capital is
achieved. We are unable to agree with counsel for Sanyal
that forfeiture of shares is permissible only in cases
expressly contemplated by Table A Model Articles i.e. for
non-payment of calls in respect of a share which is not
fully paid up.
Subject to the provisions of the Companies Act the Company
and the members are bound by the provisions contained in the
Articles of Association. The Articles regulate the internal
management of the Company and define the powers of its
officers. They also establish a contract between the
Company and the members and between the members inter se.
The contract governs the ordinary rights and obligations
incidental to membership in the Company. In the absence of
any provisions contained in the Indian Companies Act which
prohibit a Company from forfeiting a share for failure on
the part of the member to carry out an undertaking or an
engagement the Articles of a Company which provide that in
certain events membership rights of the shareholder
including his right to the share will be forfeited are
binding. The Articles of Association of the Exchange
expressly provide that in the event of the member failing to
carry out the engagement and in the conditions specified
therein his share shall stand forfeited. Articles 22, 24,
26, 27 & 29 of the Exchange relating to forfeiture of shares
in certain events are therefore valid.
There is in our judgment nothing in the procedure followed
by the Sub-Committee and the Full Committee which rendered
the forfeiture of Sanyal’s share illegal. It is not in
dispute that Sanyal incurred liability in favour of one of
the members of the Exchange to pay Rs. 438-10-0 in the
transaction relating to the sale of Indian Iron & Steel
Company’s shares and he failed to discharge that liability.
He continued to remain in default for six months even after
the resolution of the Full Committee, and on that account he
ceased to be a member and his share was forfeited. The High
Court has found that the copies of the letters dated 9th,
10th, 16th, 17th and 20th December, 1941, and of 8th
January, 11th & 19th February, 1942, were sent to Sanyal and
the usual notices relating to the complaints placed before
the Sub-Committee or the Full Committee were served upon
Sanyal, that such notices were posted on the notice board of
the Exchange that the appellant had opportunities at all
stages of the proceedings to come before the Exchange and
refute the charges made against him and that at no stage of
the proceeding until September 1, 1942, did Sanyal appear
before the Sub-Committee or the Full Committee. The High
Court was of the view that the order had not been made
against Sanyal contrary to the rules of natural justice. It
is true that Johurmull Daga complained about the- default
committed by Sanyal on December 9, 1941 and the meeting of
the Sub-Committee was held
493
on December 10, 1941. Granting that the letter of the Sub-
Committee enclosing a copy of the complaint dated December
9, 1941, sent by post to Sanyal may not have reached him
because he had left Calcutta, he had still ample notice of
the proceeding of the SubCommittee because intimation was
given to him by the notice posted on the board of the
Exchange. Sanyal raised no contention at any stage before
the Sub-Committee or before the Full Committee that he had
not received the notices of the meetings dated December 10,
1941, December 17, 1941, January 7, 1942 of the Sub-
Committee and of the meeting dated February 19, 1942 of the
Full Committee. Regularity of the proceedings of the Com-
mittees at the various meetings is not challenged before us.
We are unable to agree with the contention raised by counsel
for Sanyal that the rules of natural justice were not
complied with when the Sub-Committee and the Full Committee
passed the impugned resolutions against Sanyal.
There is no substance in the plea that the Committee had no
jurisdiction to order sale of the share forfeited. Article
27 declares that the forfeited share is the property of the
Exchange and that the Committee of the Exchange shall sell
reallot or otherwise dispose of the share, for satisfaction
of all debts due by the member to the Association or to its
members out of transactions in shares and stocks. Under its
Articles the Exchange has, authority to sell the share and
to appropriate the sale proceeds towards satisfaction of the
debts, liabilities or engagements”
But we are unable to agree with the view taken by the High
Court that the balance of the amount remaining due after
satisfying the liabilities of Sanyal remained the property
of the Exchange and that Sanyal had no right thereto. Under
the stipulations contained in Arts. 21, 22, 24, the share of
the defaulter or expelled member stands forfeited for
failure to fulfil his obligation. The share of’ Sanyal by
express resolution was forfeited. After applying the,
amount realised on sale of the share towards satisfaction of
the debts, liabilities and engagements of Sanyal to the
Exchange and its members, the balance remaining in the hands
of the Exchange had to be held for and on be-half of the
appellant. That is expressly provided in Art. 33. The
expression used in Art. 29 “The forfeiture shall involve the
extinction of all interest” is subject to those rights as by
the Articles are saved, and Art. 33 saves to the defaulting
shareholder whose share is forfeited the right to the
balance remaining with, the Exchange. Even assuming that
Articles 24 & 31 reserve to the Exchange two distinct
powers-the power to forfeit and the power to exercise a
lien, and that Art. 33 only applies to sale in enforcement
of a lien, and not to a sale under Art. 27, we are of the
view that the balance on hand after satisfying the liability
of the defaulter must still be returned to the
494
defaulting shareholder. The power to forfeit does not imply
authority to appropriate the balance, remaining in hand
after satisfying the liabilities and obligations of the
defaulter to the Exchange and its members. Any such
implication would be contrary to the intendment of s. 74 of
the Contract Act.
The power of the Exchange to forfeit the shares arises out
of the Articles and its source is in contract. Forfeiture
of share is in the nature of imposition of a penalty.
Section 74 of the Indian ,Contract Act provides :
“When a contract has been broken, if a sum is
named in the contract as the amount to be paid
in case of such breach, or if the contract
contains any other stipulation by way of
penalty, the party complaining of the breach
is entitled, whether or not actual damage or
loss is proved to have been caused thereby, to
receive from the party who has broken the
contract reasonable compensation not
exceeding, the amount so named or, as the case
may be, the penalty stipulated for.
In Fateh Chand v. Balkishan Das(1) this Court in dealing
with a case in which a claim for damages for breach of
contract to sell :a lien of immovable property arose,
pronounced that the expression “‘the contract contains any
other stipulation by way of penalty” comprehensively applies
to every covenant involving a penalty whether it is for
payment on breach of contract of money, or delivery of
property in future, or for forfeiture of right to money or
other property already delivered. Duty not to enforce the
penalty clause but only to award reasonable compensation is
statutorily imposed upon courts by s. 74 of the Indian
Contract Act. In all cases, therefore, where there is a
stipulation in the nature of penalty for forfeiture of an
amount deposited pursuant to the terms of a contract which
expressly provides for forfeiture the Court has jurisdiction
to award such sum only as it considers reasonable, but not
exceeding the amount specified in the contract as liable to
forfeiture. The same principles, in our judgment, would
apply in the ,case in which there is a stipulation in the
contract by way of a penalty, and the damages awarded to the
party complaining of the breach will not in any case exceed
the loss suffered by the complainant party. It was observed
at p. 526 in Fateh Chand’s case(,) :
“The section (s. 74) is clearly an attempt to
eliminate the somewhat elaborate refinements
made under the English common law in
distinguishing between stipulations providing
for payment of liquidated damages and
(1) [1964] IS. C.R. 515.
495
stipulatings in the nature of penalty. Under
the common law a genuine pre-estimate of
damages by mutual agreement is regarded as a
stipulation naming liquidated damages and
binding between the parties : a stipulation in
a contract in terrorem is a penalty and the
Court refuses to enforce it, awarding to the
aggrieved party only reasonable compensation.
The Indian Legislature has sought to cut
across the web of rules and presumptions under
the English common law, by enacting a uniform
principle applicable to all stipulations
naming amounts to be paid in case of breach,
and stipulations by way of penalty.”
The Court also observed at p. 530
“Section 74 declares the law as to liability
upon breach of contract where compensation is
by agreement of the parties predetermined, or
where there is a stipulation by way of
penalty. But the application of the enactment
is not restricted to cases where the aggrieved
party claims relief as a plaintiff. The
section does not confer a special benefit upon
any party; it merely declares the law that
notwithstanding any term in the contract pre-
determining damages or providing for
forfeiture of any property by way of penalty,
the Court will award to the party aggrieved
only reasonable compensation not exceeding the
amount named or penalty stipulated.”
Granting that Art. 33 deals with those cases in which lien
alone is, enforced and not in cases where forfeiture is
levied, and the obligation of the defaulting shareholder is
determined by Art. 29, in our judgment, on the principle
underlying S. 74 of the Contract Act the Exchange had no
right to hold out of the sale proceeds of the share any
amount in excess of the amount due to it or to its members.
The Exchange may not purchase its own shares. If it does
so, it amounts to reduction of capital. The legal theory of
forfeiture is that a share forfeited is only taken over by
the Company with the object of disposing it of to satisfy
its claim to enforce which the share was forfeited and all
other obligations arising against him out of his membership.
The Company is given this right to recover the loss suffered
by it by reason of the breach of contract committed by the
shareholder. If the Company is permitted to retain the
balance of the amount after satisfying the debts, liabili-
ties and engagements of the shareholder, the transaction
would not be different from one purchasing the share of the
defaulting shareholder for a value equal to the amount of
his obligations. That would be plainly illegal. We are
therefore unable to agree with the
496
High Court that the Exchange was entitled to retain the
balance after satisfying the debts, liabilities and
engagements of the appellant to the other members or to the
Exchange.
The decree passed by the High Court is set aside and the
case remanded to the High Court for determining the extent
of the liabilities of the appellant to the Exchange not only
in respect of the transactions with Johurmull Daga but in
respect of all other outstanding liabilities of the
appellant to other members of the Exchange and to the
Exchange which are enforceable under the Articles. The
appellant is entitled to receive from the Exchange the
balance remaining due after deducting the aggregate amount
or value of the obligations. He will be entitled to
interest on the balance at the rate of 6% per annum from the
date of the institution of the suit. Parties will bear
their own costs throughout.
This appeal was filed in forma pauperis. The ‘appellant
will pay the court fee payable on the memorandum of appeal
if he had not been permitted to appeal in forma pauperis.
V.P.S. Appeal allowed and case remanded.
497

 

 

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